The UAE Cabinet recently issued Ministerial Decision No.81 of 2023, concerning the conditions for investment funds to qualify as Qualifying Investment Funds by providing the specific reference of Investment Business, Real Estate Income, Real Estate Gains, Real Estate Asset Percentage, and Real Estate Investment Trust ("REIT") in line with the UAE corporate tax law. This Decision sets out specific requirements that investment funds must fulfill to be exempt from corporate tax.
Conditions for Qualifying Investment Funds:
To be considered a Qualifying Investment Fund, an investment fund (excluding Real Estate Investment Trusts - REITs) must meet the following conditions:
Main Business Activities:
The business activities of the investment fund should primarily revolve around Investment Business activities, while any other business endeavors conducted must be ancillary or incidental to the main activities, as prescribed in the applicable state laws.
Restrictions on Ownership Interests:
If the investment fund has fewer than ten investors, no individual investor or its Related Parties can own more than 30% of the ownership interests. For funds with ten or more investors, no single investor and its Related Parties are permitted to possess more than 50% of the ownership interests.
Management by Skilled Experts:
The investment fund must be overseen or advised by an Investment Manager comprising at least three investment professionals
Avoiding Investor Control:
The day-to-day management of the investment fund should not be under the control of its investors.
Resident Investment Managers and Their Activities:
The Business Activities of a resident Investment Manager attributed to a resident investment fund should be regarded as Investment Business activities. Accordingly, the Taxable Income of the Investment Manager should be adjusted following the provisions in Article (20) of the Corporate Tax Law.
Business Activities Attributed to Resident Investment Funds:
Business Activities of an Investment Manager attributed to a resident investment fund shall be considered Investment Business activities if they meet any of the following conditions:
- Investment Manager Subject to Corporate Tax: The Business Activities are subject to Corporate Tax in the state through the Investment Manager.
- Conditions to be satisfied: The Business Activities undertaken by an Investment Manager that meet the conditions specified in Clause (1) of Article (15) of the Corporate Tax Law, provided that the reference to the Non-Resident Person in that Clause was related to a Resident Person.
- Ancillary or Incidental Business Activities: Any other Business Activities conducted by the investment fund should be considered ancillary or incidental if the combined Revenue of such activities does not exceed 5% of the total Revenue of the investment fund in the same Financial Year."
Timeframe for Ownership Interests Fulfillment:
The following points are to be considered:
- Early Fulfillment Consideration: The investment fund will be considered to have fulfilled the ownership interest’s conditions under paragraph (b) of Clause (Conditions for Exemption and Authority's Discretion:
- The fulfillment of the conditions specified in Clause (1) of the mentioned Article during the initial two Financial Years after its establishment can be waived if adequate evidence demonstrates the investors' intention to satisfy these conditions after the initial two Financial Years.
- The Authority holds the authority to make a determination regarding such fulfillment.
Exemption for Non-Compliance:
If the investment fund fails to meet the ownership interest’s conditions stated in Clause (3) of the same Article, it will lose its status as an Exempt Person from the start of the third Financial Year after its establishment.
Guidelines and Implementation of Decisions:
The decision not only outlines the conditions but also provides detailed guidelines for the implementation of these requirements. It addresses crucial matters, such as attributing the Business Activities of a resident Investment Manager to a resident investment fund, and clearly defines Investment Business activities in such scenarios. The status of ancillary or incidental Business Activities conducted by the investment fund is also clarified. Provisions related to meeting ownership interest conditions in the initial two Financial Years and the consequences of non-compliance after that period are also specified.
Conditions for REITs (Real Estate Investment Trusts)
Some specific conditions for REITs (Real Estate Investment Trusts) are prescribed to be Qualifying Investment Funds including exceeding a certain value of real estate assets, having a percentage of share capital floated on a Recognized Stock Exchange, or being owned by specified institutional investors. The maintenance of an average Real Estate Asset Percentage during a relevant period is also a key factor.
Tax Treatment under the Ministerial Implementing Decisions:
For investors in Qualifying Investment Funds, their income for the relevant Tax Period shall be adjusted based on the fund's financial statements and their ownership interests. The decision further covers the treatment of distributions received from the fund's income and includes provisions for Unincorporated Partnerships as Taxable Persons. The Minister may issue implementing decisions, and the decision shall come into effect upon its publication in the Official Gazette. This is a significant step to streamline taxation for investment funds in the UAE.
The latest Decision introduces specific conditions for Qualifying Investment Funds seeking corporate tax exemption, covering main business activities, ownership interest restrictions, management requirements, and avoidance of investor control. The decision clarifies tax treatment for investors and outlines provisions for Real Estate Investment Trusts (REITs) to qualify as Qualifying Investment Funds. It also includes comprehensive guidelines for implementation, addressing Business Activities attribution, ancillary or incidental activities, and consequences of non-compliance.
Avail expert advisory from top Tax Consultants in UAE
The UAE Ministerial Decision No. 81 of 2023 aims to create an investment-friendly environment while ensuring compliance with tax regulations. Thus, Investment Funds are advised to seek the expert services of trusted Corporate Tax Consultants in UAE to effectively determine their taxability in compliance with the corporate tax law.
Salah is a qualified Tax Consultant with over 5 years of experience gained in distinct intricate tax matters, he has high expertise in conducting tax negotiations and investigations with the Federal Tax Authority and other external Tax Bodies. He is well-versed with reviewing and drafting tax documents, upon tax preparation and filing. Salah has also advised on a plethora of tax matters, he draws much attention to tax filing procedures and to offering professional investigations to underlying tax complexities.